By Stanley White
TOKYO (Reuters) – Japanese investors have clipped the wings of a resurgent U.S. dollar as they position for the likelihood that the U.S. Federal Reserve will take steps to flatten the Treasury yield curve.
Ahead of the Fed’s two-day policy meeting that ends on Wednesday, speculation is growing that the U.S. central bank might adopt yield targets on bonds, or some other measures to anchor long-term yields.
The yield curve has steepened in recent days as improving U.S. data drove a sell-off in U.S. bonds, with 10-year yields () rising 28 basis points to 0.959% last week.
Most global investors don’t expect the Fed will try to anchor Treasury yields. In Japan, however, the first major economy to adopt yield-curve-control four years ago, there is more chatter about such a possibility.
“Japanese names have been very active since Monday in dollar/yen, trying to trade off the chance of some kind of yield-curve control from the Fed,” said Yukio Ishizuki, foreign exchange strategist at Daiwa Securities.
“I personally don’t think yield curve control is necessary now, but the dollar is under clear selling pressure.”
Traders said Japanese investors have been heavy sellers of dollars for yen this week, positioning for possibly lower U.S. yields.
The dollar had gained 1.6% against the yen last week, its best weekly performance in more than two months, as spreads between U.S. and Japanese yields widened.
This is a sign that the yield spread is becoming the main trading factor for dollar/yen, said Junichi Ishikawa, senior foreign exchange strategist at IG Securities.
GRAPHIC: Dollar/Yen and the Treasury Yield Curve – https://fingfx.thomsonreuters.com/gfx/mkt/xegpbyejevq/Pasted%20image%201591681935543.png
If the Fed does not take action this week, traders expect the dollar could break into a new higher trading range versus the yen, spurred on by a steepening Treasury yield curve.
Those that expect it to do nothing point to 10-year Treasury yields () still being quite low.
“The current risk-seeking environment and the shift up in yields has supported dollar/yen’s break above 109,” said Toshinobu Chiba, chief fixed income portfolio manager at Nissay Asset Management Co.
“However, this yen weakness will not continue because dollar liquidity is too much now.”
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